-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nrg9nvLm+Fj5zGY3q/ySfPGAlrp72eRhQBPBCO/yPzx3MlnlRQ2be8bLMTgmuQsq 9jeRY3hCp5sPeowgsZHS4w== 0000950128-02-000670.txt : 20020919 0000950128-02-000670.hdr.sgml : 20020919 20020919155301 ACCESSION NUMBER: 0000950128-02-000670 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020919 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLOCK COMMUNICATIONS INC CENTRAL INDEX KEY: 0001177238 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 344374555 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-96619 FILM NUMBER: 02767800 BUSINESS ADDRESS: STREET 1: 541 N SUPERIOR STREET STREET 2: P O BOX 921 CITY: TOLEDO STATE: OH ZIP: 43697-0921 BUSINESS PHONE: 4197246257 10-Q 1 j9618401e10vq.txt PERIOD ENDED 6/30/2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO_______. COMMISSION FILE NUMBER 333-96619 ---------------------- BLOCK COMMUNICATIONS, INC. -------------------------- (Exact name of registrant as specified in its charter) OHIO 34-4374555 -------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 541 N. SUPERIOR STREET, TOLEDO, OHIO 43660 ------------------ (Address of principal executive offices) (Zip code) (419) 724-6257 -------------------------- (Registrant's telephone number, including area code) 541 N. SUPERIOR STREET, P.O. BOX 921, TOLEDO, OHIO 43697-0921 ------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. YES [ ] NO [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. VOTING COMMON STOCK , (PAR VALUE $.10) NON-VOTING COMMON STOCK, (PAR VALUE $.10) -------------------------- -------------------------- 29,400 SHARES AS OF SEPTEMBER 18, 2002 427,786 SHARES AS OF SEPTEMBER 18, 2002
TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS CONDENSED CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Exhibits and reports on Form 8-K SIGNATURES Certification of the Managing Director Certification of the Chief Financial Officer PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30 DECEMBER 31 2002 2001 -------------------------------- (UNAUDITED) (NOTE 1) ASSETS Current assets: Cash and cash equivalents $ 30,898,988 $ 5,882,732 Receivables, less allowances for doubtful accounts and discounts of $5,081,970 and $4,861,094, respectively 39,681,701 44,225,634 Recoverable income taxes 6,598,520 4,483,300 Inventories 4,397,360 5,548,784 Prepaid expenses 2,783,579 3,703,756 Broadcast rights 5,891,948 6,083,782 Deferred income taxes 6,657,350 9,803,800 -------------------------------- Total current assets 96,909,446 79,731,788 Property, plant and equipment: Land and land improvements 12,221,476 12,194,446 Buildings and leasehold improvements 41,492,228 41,186,933 Machinery and equipment 211,086,997 209,196,143 Cable television distribution systems and equipment 186,662,257 187,804,505 Security alarm and video systems installation costs 6,261,796 5,923,280 Construction in progress 14,298,479 11,495,916 -------------------------------- 472,023,233 467,801,223 Less allowances for depreciation and amortization 216,568,020 204,605,517 -------------------------------- 255,455,213 263,195,706 Other assets: Goodwill 53,748,696 52,461,687 Other intangibles, net of accumulated amortization 37,574,340 31,451,414 Deferred income taxes 9,732,067 12,946,900 Prepaid pension costs 11,952,049 11,145,446 Cash value of life insurance, net of policy loans of $12,735,560 11,150,307 10,691,105 Pension intangibles 7,230,030 7,230,030 Broadcast rights, less current portion 3,422,892 6,217,880 Deferred financing costs 12,332,848 5,676,725 Other 3,064,764 3,138,246 -------------------------------- 150,207,993 140,959,433 -------------------------------- $502,572,652 $483,886,927 ================================
1 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS
JUNE 30 DECEMBER 31 2002 2001 ------------------------------ (UNAUDITED) (NOTE 1) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 11,036,595 $ 12,355,122 Salaries, wages and payroll taxes 14,132,895 16,321,468 Workers' compensation and medical reserves 9,403,124 9,184,074 Other accrued liabilities 30,828,872 32,279,367 Current maturities of long-term debt 1,261,760 9,908,334 ------------------------------ Total current liabilities 66,663,246 80,048,365 Long-term debt, less current maturities 252,503,855 227,355,513 Other long-term obligations 127,542,241 126,635,551 Minority interest 12,351,519 12,264,398 Stockholders' equity: 5% Non-cumulative, non-voting Class A Stock, par value $100 a share (entitled in liquidation to $100 per share in priority over Common Stock)-- 15,680 shares authorized; 12,620 shares issued and outstanding 1,262,000 1,262,000 Common Stock, par value $.10 a share: Voting Common Stock--29,400 shares authorized, issued and outstanding 2,940 2,940 Non-voting Common Stock--588,000 shares authorized; 427,786 shares issued and outstanding 42,779 42,779 Accumulated other comprehensive loss (4,499,520) (4,725,589) Additional paid-in capital 771,274 771,274 Retained earnings 45,932,318 40,229,696 ------------------------------ 43,511,791 37,583,100 ------------------------------ $ 502,572,652 $ 483,886,927 ==============================
See accompanying notes. 2 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2002 2001 2002 2001 ------------------------------ ------------------------------ Revenue: Publishing $ 64,646,626 $ 67,859,634 $ 126,209,428 $ 129,714,071 Cable 25,240,422 22,237,089 50,337,257 43,384,995 Broadcasting 9,686,810 8,865,495 18,687,463 17,592,705 Other Communications 6,652,448 6,381,326 13,005,192 11,530,016 ------------------------------ ------------------------------ 106,226,306 105,343,544 208,239,340 202,221,787 Expense: Publishing 61,227,791 65,295,840 122,747,104 130,783,321 Cable 22,392,149 18,641,371 45,206,105 37,085,564 Broadcasting 8,954,146 9,421,843 18,009,185 18,601,069 Other Communications 6,635,577 7,181,472 12,879,314 13,537,085 Corporate general and administrative 505,795 600,224 1,457,075 950,259 ------------------------------ ------------------------------ 99,715,458 101,140,750 200,298,783 200,957,298 ------------------------------ ------------------------------ Operating income 6,510,848 4,202,794 7,940,557 1,264,489 Nonoperating income (expense): Interest expense (5,894,078) (4,746,827) (10,642,227) (9,422,453) Gain on disposition of Monroe Cablevision -- -- 21,600,189 -- Loss on early extinguishment of debt (8,989,786) -- (8,989,786) -- Change in fair value of interest rate swaps (1,183,769) 674,797 278,057 (905,023) Interest income 22,116 22,462 30,947 28,582 ------------------------------ ------------------------------ (16,045,517) (4,049,568) 2,277,180 (10,298,894) ------------------------------ ------------------------------ Income (loss) before income taxes and minority interest (9,534,669) 153,226 10,217,737 (9,034,405) Provision (credit) for income taxes: Federal: Current (3,369,542) (242,001) (176,926) (1,423,916) Deferred 239,699 (157,967) 3,500,000 (1,452,682) ------------------------------ ------------------------------ (3,129,843) (399,968) 3,323,074 (2,876,598) State and local 413,724 405,498 753,339 280,299 ------------------------------ ------------------------------ (2,716,119) 5,530 4,076,413 (2,596,299) ------------------------------ ------------------------------ Income (loss) before minority interest (6,818,550) 147,696 6,141,324 (6,438,106) Minority interest (79,947) (13,220) (87,121) 40,438 ------------------------------ ------------------------------ Net income (loss) $ (6,898,497) $ 134,476 $ 6,054,203 $ (6,397,668) ============================== ==============================
See accompanying notes. 3 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock ------------------------------------- Class A Stock Voting Non-Voting --------------------------------------------------------- Shares Amount Shares Amount Shares Amount ------------------------------------------------------------- Balance at January 1, 2002 12,620 $1,262,000 29,400 $2,940 427,786 $ 42,779 Net income Amortization of fair value of interest rate swaps at January 1, 2001 (net of deferred taxes of $127,250) Total comprehensive income Cash dividends declared: Class A stock - $2.50 per share Common Stock: Voting - $0.70 per share Non-voting - $0.70 per share --------------------------------------------------------- Balances at June 30, 2002 12,620 $1,262,000 29,400 $2,940 427,786 $ 42,779 ========================================================= Balance at January 1, 2001 12,620 $1,262,000 29,400 $2,940 430,123 $ 43,012 Net loss Fair value of interest rate swaps at January 1, 2001, less accumulated amortization of $353,319 (net of deferred taxes of $630,750) Total comprehensive loss Cash dividends declared: Class A stock - $2.50 per share Common Stock: Voting - $0.70 per share Non-voting - $0.70 per share --------------------------------------------------------- Balances at June 30, 2001 12,620 $1,262,000 29,400 $2,940 430,123 $ 43,012 ========================================================= Accumulated Other Additional Comprehensive Paid-in Retained Loss Capital Earnings Total ------------------------------------------------------------------ Balance at January 1, 2002 $(4,725,589) $771,274 $40,229,696 $37,583,100 Net income 6,054,203 6,054,203 Amortization of fair value of interest rate swaps at January 1, 2001 (net of deferred taxes of $127,250) 226,069 226,069 ----------- Total comprehensive income 6,280,272 Cash dividends declared: Class A stock - $2.50 per share (31,550) (31,550) Common Stock: Voting - $0.70 per share 20,550 20,580 Non-voting - $0.70 per share (299,451) (299,451) -------------------------- (351,581) (351,581) ------------------------------------------------------------- Balances at June 30, 2002 $(4,499,520) $771,274 $45,932,318 $43,511,791 ============================================================= Balance at January 1, 2001 $ (521,942) $771,274 $59,832,216 $61,389,500 Net loss (6,397,668) (6,397,668) Fair value of interest rate swaps at January 1, 2001 less accumulated amortization of $353,319 (net of deferred taxes of $630,750) (1,122,054) (1,122,054) ----------- Total comprehensive loss (7,519,722) Cash dividends declared: Class A stock - $2.50 per share (31,550) (31,550) Common Stock: Voting - $0.70 per share 20,580 (20,580) Non-voting - $0.70 per share (301,086) (301,086) -------------------------- (353,216) (353,216) ------------------------------------------------------------- Balances at June 30, 2001 $(1,643,996) $771,274 $53,081,332 $53,516,562 =============================================================
See accompanying notes. 4 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 2002 2001 ------------------------------ OPERATING ACTIVITIES Net income (loss) $ 6,054,203 $ (6,397,668) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 22,277,829 19,792,377 Amortization of intangibles and deferred charges 1,293,452 1,895,479 Amortization of broadcast rights 3,322,689 3,052,523 Payments for broadcast rights (2,531,544) (2,792,012) Gain on sale of Monroe Cablevision (21,600,189) - Deferred income taxes (credit) 3,500,000 (1,452,682) Provision for bad debts 986,654 1,352,286 Minority interest 87,121 (40,438) Change in fair value of interest rate swaps (278,057) 905,023 Loss on disposal of property and equipment 402,814 36,610 Write off of deferred charges related to extinguished debt 2,697,784 - Changes in operating assets and liabilities: Receivables 3,525,876 7,526,859 Inventories 1,108,986 3,108,591 Prepaid expenses 783,574 148,896 Accounts payable (1,325,934) (6,787,474) Salaries, wages, payroll taxes and other accrued liabilities (2,365,385) (5,270,441) Other assets 60,592 (3,109,636) Postretirement benefits and other long-term obligations 3,577,513 2,565,383 ------------------------------ Net cash provided by operating activities 21,577,978 14,533,676 INVESTING ACTIVITIES Additions to property, plant and equipment (12,647,899) (37,602,454) Change in cash value of life insurance (459,201) 6,882,307 Payments for acquisitions - (990,000) Proceeds from sale of Monroe Cablevision 12,059,115 - Proceeds from disposal of property and equipment 40,617 13,218 ------------------------------ Net cash used in investing activities (1,007,368) (31,696,929) FINANCING ACTIVITIES Issuance of subordinated notes 175,000,000 - Borrowings under new term loan agreement 75,000,000 - Payments on senior notes (67,499,000) (6,500,000) Payments on previous term loan (75,000,000) - Borrowings (payments) on long term revolver (92,500,000) 30,000,000 Net payments on short term revolver - (2,620,229) Financing costs deferred (10,000,968) - Cash dividends paid (351,581) (353,216) Payments on notes payable and capital leases (202,805) (159,925) ------------------------------ Net cash provided by financing activities 4,445,646 20,366,630 ------------------------------ Increase in cash and cash equivalents 25,016,256 3,203,377 Cash and cash equivalents at beginning of period 5,882,732 4,212,970 ------------------------------ Cash and cash equivalents at end of period $ 30,898,988 $ 7,416,347 ============================== Non-cash borrowings under capital lease $ 903,798 $ - ==============================
See accompanying notes. 5 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS BLOCK COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2002 NOTE 1--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Block Communications, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the annual consolidated financial statements and footnotes thereto. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. New Accounting Standards Effective January 1, 2001, the Company adopted Statement of the Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement Nos. 137 and 138, (collectively, SFAS No. 133), which requires the Company to record all derivatives on the balance sheet at fair value. At June 30, 2002, the Company participates in six interest-rate swap contracts. One of these contracts is accounted for as a fair value hedge and therefore changes in the fair value of the derivative have no impact on the Company's results of operations. The remaining contracts either do not qualify for hedge accounting or the Company has not elected to implement hedge accounting. Accordingly, a non-cash derivative valuation gain (loss) of $278,057 and $(905,023) has been recognized during the six-month periods ended June 30, 2002 and 2001, respectively. Effective January 1, 2002, the Company adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased goodwill and indefinite lived intangible assets are no longer amortized but reviewed annually for impairment, or more frequently if impairment indicators arise. Intangible assets with lives restricted by contractual, legal or other means will continue to be amortized over their useful lives. During the six month period ended June 30, 2001, the Company recognized $1,674,070 of amortization expense related to goodwill and indefinite-lived intangibles, resulting in a net loss of $4,723,598 when adjusted for the non-amortization provisions of SFAS No. 142. The Company has completed the initial impairment testing required by SFAS No. 142. No impairment charges have been recognized based on the results of this testing. Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. The adoption of this standard has had no effect on the Company's consolidated results of operations or financial position for the six months ended June 30, 2002. In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued and requires a gain or loss related to the extinguishment of debt to no longer be recorded as extraordinary item. The Company has elected early adoption as encouraged by SFAS No. 145, which would not otherwise require adoption until fiscal year 2003. As a result, losses on extinguishment of debt totaling $9.0 million are included in income from continuing operations at June 30, 2002. In July 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued and applies to fiscal years beginning after December 31, 2002. The pronouncement requires certain costs associated with a restructuring, discontinued operation or plant closing to be recognized as incurred rather than at the date of commitment to an exit or disposal plan. The Company does not expect the adoption of this standard to significantly impact its financial position or results of operations. 6 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 2--ACQUISITION Effective March 29, 2002, the Company consummated an asset exchange agreement with Comcast Corporation which resulted in an exchange of 100% of the assets of Monroe Cablevision for 100% of the assets of Comcast's Bedford, Michigan operations and $12.1 million cash. The Company recorded a $21.6 million gain on the disposition of Monroe Cablevision resulting from the difference in fair value versus the net book value of assets exchanged. For tax reporting, the transaction has been treated as a like kind exchange and the amount of the gain in excess of the cash received has been deferred. The operations of Monroe Cablevision are included in the Company's financial statements through March 28, 2002. The net assets of the acquired Bedford system have been recorded at their fair value and relate primarily to the cable distribution system and intangibles. The operations of the Bedford system have been included in the Company's financial statements since March 29, 2002. NOTE 3--LONG-TERM DEBT In April 2002, the Company issued $175 million of 9 1/4% senior subordinated notes, the proceeds of which where used to pay off the existing senior term loan and senior notes and a portion of the balance outstanding under the revolving credit agreement. The subordinated notes mature April 15, 2009. On May 15, 2002 the company refinanced the remainder of its senior credit facilities. The new senior credit facilities include a $40 million delayed draw term loan A, a $75 million term loan B, and an $85 million revolver. Term loan A matures May 2009, however the availability is reduced if required withdrawals are not made ($20 million by June 2003 and $20 million by December 2003). Term loan B matures November 2009. The term loan A and revolving credit agreements provide for scheduled reductions beginning September 2004, with a final maturity date of May 2009. Only the availability under term loan B was drawn at the date of the refinance. In conjunction with the refinancing, the Company has recognized a second quarter loss of $9.0 million consisting of premiums paid to the existing noteholders and unamortized deferred financing costs relating to the refinanced debt. As noted above, this amount is included in income from continuing operations as the Company has elected early adoption of SFAS No. 145. During the second quarter, the company has entered into three additional swap contracts related to the new debt and existing swaps. One of these is a cancelable swap that effectively converts a portion of the Company's fixed rate subordinated notes to a variable rate based on LIBOR. This contract has been accounted for as a fair value hedge, resulting in the recognition of a swap asset with an offsetting adjustment to the carrying value of the underlying debt. The table below details the amounts recognized as long-term debt: JUNE 30, DECEMBER 31, 2002 2001 -------------------------- Subordinated notes $175,000,000 $ - Senior term loan 75,000,000 75,000,000 Long-term revolver - 92,500,000 Senior notes payable - 67,499,000 Capital leases 2,965,840 2,264,847 Fair value adjustment of subordinated notes 799,775 - -------------------------- 253,765,615 237,263,847 Current maturities 1,261,760 9,908,334 -------------------------- $252,503,855 $227,355,513 ========================== 7 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 4--OTHER LONG-TERM OBLIGATIONS Other long-term obligations consist of the following: JUNE 30, DECEMBER 31, 2002 2001 ------------------------------- Other postretirement benefits $ 81,996,601 $ 80,824,000 Pension liabilities 18,780,881 17,412,753 Deferred compensation obligations 14,633,445 13,594,736 Interest rate swap liability 5,308,380 6,739,531 Broadcast rights payable 4,623,696 6,446,520 Other 2,199,238 1,618,011 ------------------------------- $127,542,241 $126,635,551 =============================== NOTE 5--BUSINESS SEGMENT INFORMATION The Company has three reportable segments--publishing, cable and broadcasting. The publishing segment operates two daily newspapers located in Ohio and Pennsylvania. The cable segment includes two cablevision companies located in Ohio. The broadcasting segment has five television stations located in Idaho, Illinois, Indiana, Kentucky, and Ohio. The "Other" category includes non-reportable segments and corporate items. The non-reportable segments provide services such as telephony, security systems and monitoring, cable plant construction and distributed advertising services. The following table presents certain financial information for the three reportable segments and the other category. 8 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 5--BUSINESS SEGMENT INFORMATION (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues: Publishing $ 65,589,540 $ 69,079,425 $ 127,842,873 $ 132,611,102 Intersegment 942,914 1,219,791 1,633,445 2,897,031 ------------- ------------- ------------- ------------- External Publishing 64,646,626 67,859,634 126,209,428 129,714,071 Cable 25,274,544 22,442,889 50,371,379 43,796,195 Intersegment 34,122 205,800 34,122 411,200 ------------- ------------- ------------- ------------- External Cable 25,240,422 22,237,089 50,337,257 43,384,995 Broadcasting 9,686,810 8,865,495 18,687,463 17,592,705 Other 6,652,448 6,381,326 13,005,192 11,530,016 ------------- ------------- ------------- ------------- 106,226,306 105,343,544 208,239,340 202,221,787 Operating income (loss): Publishing 4,288,526 3,294,326 4,978,881 850,122 Intersegment 869,691 730,532 1,516,557 1,919,372 ------------- ------------- ------------- ------------- Net Publishing 3,418,835 2,563,794 3,462,324 (1,069,250) Cable 1,935,356 2,772,341 3,536,846 4,340,524 Intersegment (912,917) (823,377) (1,594,306) (1,958,907) ------------- ------------- ------------- ------------- Net Cable 2,848,273 3,595,718 5,131,152 6,299,431 Broadcasting 732,664 (556,348) 678,278 (1,008,364) Corporate expenses (505,795) (600,224) (1,457,075) (950,259) Other 16,871 (800,146) 125,878 (2,007,069) ------------- ------------- ------------- ------------- 6,510,848 4,202,794 7,940,557 1,264,489 Nonoperating income (expense) (16,045,517) (4,049,568) 2,277,180 (10,298,894) ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest $ (9,534,669) $ 153,226 $ 10,217,737 $ (9,034,405) ============= ============= ============= =============
NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION The new credit facilities referred to in Note 3 to these financial statements are guaranteed jointly and severally by all of the Company's wholly owned subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional. WAND (TV) Partnership, a partially owned subsidiary of the Company, is not a guarantor of the credit facilities. Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Financial information for the Parent Company includes both the Holding Company and its one division, The Toledo Blade Company. Investments in subsidiaries are presented using the cost method of accounting and eliminated. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups. 9 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED) CONSOLIDATING CONDENSED BALANCE SHEET JUNE 30, 2002
Unconsolidated --------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated ------------------------------------------------------------------------------- ASSETS: Current assets $ 52,182,457 $ 41,387,970 $ 3,294,743 $ 44,276 $ 96,909,446 Property, plant and equipment, net 28,139,463 220,829,273 6,003,841 482,636 255,455,213 Intangibles, net 4,562,448 58,493,141 28,068,958 198,489 91,323,036 Cash value of life insurance, net 10,940,929 209,378 - - 11,150,307 Prepaid pension costs 1,635,204 10,316,845 - - 11,952,049 Pension intangibles 645,495 6,584,535 - - 7,230,030 Investments in subsidiaries 191,066,136 - - (191,066,136) - Other 8,429,018 20,123,553 - - 28,552,571 ------------------------------------------------------------------------------- $ 297,601,150 $ 357,944,695 $ 37,367,542 $(190,340,735) $ 502,572,652 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities $ 15,158,335 $ 50,876,182 $ 668,788 $ (40,059) $ 66,663,246 Long-term debt 252,503,855 - - - 252,503,855 Other long-term obligations 17,315,182 226,744,186 35,467 (116,552,594) 127,542,241 Minority interest - - - 12,351,519 12,351,519 Stockholders' equity 12,623,778 80,324,327 36,663,287 (86,099,601) 43,511,791 ------------------------------------------------------------------------------- $ 297,601,150 $ 357,944,695 $ 37,367,542 $(190,340,735) $ 502,572,652 ===============================================================================
10 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED) CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2001
Unconsolidated ------------------------------------------------ Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated ------------------------------------------------------------------------------- ASSETS: Current assets $ 15,717,915 $ 55,969,309 $ 4,138,933 $ 3,905,631 $ 79,731,788 Property, plant and equipment, net 28,992,144 228,208,431 5,962,544 32,587 263,195,706 Intangibles, net 4,784,698 50,860,955 28,068,959 198,489 83,913,101 Cash value of life insurance, net 10,486,057 205,048 - - 10,691,105 Prepaid pension costs 1,852,686 9,276,267 - 16,493 11,145,446 Pension intangibles 645,495 6,584,535 - - 7,230,030 Investments in subsidiaries 211,745,229 - - (211,745,229) - Other 10,366,210 17,627,480 2,554 (16,493) 27,979,751 ------------------------------------------------------------------------------- $ 248,590,434 $ 368,732,025 $ 38,172,990 $(207,608,522) $ 483,886,927 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities $ 24,017,694 $ 50,444,551 $ 1,773,706 $ 3,812,414 $ 80,048,365 Long-term debt 227,355,513 - - - 227,355,513 Other long-term obligations 21,238,306 242,620,050 - (137,222,805) 126,635,551 Minority interest - - - 12,264,398 12,264,398 Stockholders' equity 11,978,921 75,667,424 36,399,284 (86,462,529) 37,583,100 ------------------------------------------------------------------------------- $ 284,590,434 $ 368,732,025 $ 38,172,990 $(207,608,522) $ 483,886,927 ===============================================================================
11 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 2002
Unconsolidated ----------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated -------------------------------------------------------------------------------- Revenue $ 21,037,089 $ 85,941,322 $ 1,751,366 $ (2,503,471) $ 106,226,306 Expenses 20,208,285 80,443,365 1,659,828 (2,596,020) 99,715,458 -------------------------------------------------------------------------------- Operating income 828,804 5,497,957 91,583 92,549 6,510,848 Nonoperating income (expense) (16,051,073) 2,288 3,268 - (16,045,517) -------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (15,222,269) 5,500,245 94,806 92,549 (9,534,669) Provision (credit) for income taxes (5,243,320) 2,527,201 - - (2,716,119) -------------------------------------------------------------------------------- Income (loss) before minority interest (9,978,949) 2,973,044 94,806 92,549 (6,818,550) Minority interest - - - (79,947) (79,947) -------------------------------------------------------------------------------- Net income (loss) $ (9,978,949) $ 2,973,044 $ 94,806 $ 12,602 $ (6,898,497) ================================================================================
CONSOLIDATING CONDENSED STATEMENT OF INCOME THREE MONTHS ENDED JUNE 30, 2001
Unconsolidated ------------------------------------------------ Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated --------------------------------------------------------------------------------- Revenue $ 22,784,263 $ 84,637,880 $ 1,720,254 $ (3,798,853) $ 105,343,544 Expenses 21,438,282 81,523,903 1,695,886 (3,517,321) 101,140,750 --------------------------------------------------------------------------------- Operating income (loss) 1,345,981 3,113,977 24,368 (281,532) 4,202,794 Nonoperating income (expense) (4,071,272) 6,012 15,692 - (4,049,568) --------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (2,725,291) 3,119,989 40,060 (281,532) 153,226 Provision (credit) for income taxes 560,535 (555,005) - - 5,530 --------------------------------------------------------------------------------- Income (loss) before minority interest (3,285,826) 3,674,994 40,060 (281,532) 147,696 Minority interest - - - (13,220) (13,220) --------------------------------------------------------------------------------- Net income (loss) $ (3,285,826) $ 3,674,994 $ 40,060 $ (294,752) $ 134,476 =================================================================================
12 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 2002
Unconsolidated ------------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated --------------------------------------------------------------------------------- Revenue $ 40,106,115 $ 169,216,689 $ 3,564,164 $ (4,647,628) $ 208,239,340 Expenses 41,065,813 161,023,211 3,307,436 (5,097,677) 200,298,783 --------------------------------------------------------------------------------- Operating income (loss) (959,698) 8,193,478 256,728 450,049 7,940,557 Nonoperating income 2,265,409 4,496 7,275 - 2,277,180 --------------------------------------------------------------------------------- Income before income taxes and minority interest 1,305,711 8,197,974 264,003 450,049 10,217,737 Provision for income taxes 535,342 3,541,071 - - 4,076,413 --------------------------------------------------------------------------------- Income before minority interest 770,369 4,656,903 264,003 450,049 6,141,324 Minority interest - - - (87,121) (87,121) --------------------------------------------------------------------------------- Net income $ 770,369 $ 4,656,903 $ 264,003 $ 362,928 $ 6,054,203 =================================================================================
CONSOLIDATING CONDENSED STATEMENT OF INCOME SIX MONTHS ENDED JUNE 30, 2001
Unconsolidated ----------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated --------------------------------------------------------------------------------- Revenue $ 43,455,300 $ 163,136,055 $ 3,302,136 $ (7,671,704) $ 202,221,787 Expenses 43,105,742 161,819,917 3,440,367 (7,408,728) 200,957,298 --------------------------------------------------------------------------------- Operating income (loss) 349,558 1,316,138 (138,231) (262,976) 1,264,489 Nonoperating income (expense) (10,319,541) 4,955 15,692 - (10,298,894) --------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (9,969,983) 1,321,093 (122,539) (262,976) (9,034,405) Provision (credit) for income taxes (2,710,209) 113,910 - - (2,596,299) --------------------------------------------------------------------------------- Income (loss) before minority interest (7,259,774) 1,207,183 (122,539) (262,976) (6,438,106) Minority interest - - - 40,438 40,438 --------------------------------------------------------------------------------- Net income (loss) $ (7,259,774) $ 1,207,183 $ (122,539) $ (222,538) $ (6,397,668) =================================================================================
13 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 Unconsolidated -------------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated --------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (16,311,823) $ 38,260,888 $ (818,180) $ 447,093 $ 21,577,978 Additions to property, plant and equipment (352,297) (11,312,302) (545,089) (438,211) (12,647,899) Other investing activities 11,638,263 2,268 - - 11,640,531 --------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 11,285,966 (11,310,034) (545,089) (438,211) (1,007,368) Issuance of subordinated notes 175,000,000 - - - 175,000,000 Borrowings on term loan 75,000,000 - - - 75,000,000 Payments on long-term debt (234,999,000) - - - (234,999,000) Other financing activity 16,277,839 (26,824,311) - (8,882) (10,555,354) --------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 31,278,839 (26,824,311) - (8,882) 4,445,646 --------------------------------------------------------------------------------- Increase (decrease) in cash and equivalents 26,252,982 126,543 (1,363,269) - 25,016,256 Cash and equivalents at beginning of period 3,186,078 (64,937) 2,761,591 - 5,882,732 --------------------------------------------------------------------------------- Cash and equivalents at end of period $ 29,439,060 $ 61,606 $ 1,398,322 $ - $ 30,898,988 =================================================================================
14 PART I. FINANCIAL INFORMATION FINANCIAL STATEMENTS NOTE 6--SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001
Unconsolidated ----------------------------------------------- Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiary Eliminations Consolidated ---------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (5,424,679) $ 17,634,121 $ 2,061,258 $ 262,976 $ 14,533,676 Additions to property, plant and equipment (2,027,420) (35,269,121) (42,937) (262,976) (37,602,454) Other investing activities 5,864,048 41,477 - - 5,905,525 ---------------------------------------------------------------------------- Net cash provided by (used in) investing activities 3,836,628 (35,227,644) (42,937) (262,976) (31,696,929) Payments on long-term debt (6,500,000) - - - (6,500,000) Borrowings on long-term revolver 30,000,000 - - - 30,000,000 Other financing activity (20,285,293) 17,151,923 - - (3,133,370) ---------------------------------------------------------------------------- Net cash provided by financing activities 3,214,707 - - - 20,366,630 ---------------------------------------------------------------------------- Increase (decrease) in cash and equivalents 1,626,656 (441,600) 2,018,321 - 3,203,377 Cash and equivalents at beginning of period 2,021,900 1,290,070 901,000 - 4,212,970 ---------------------------------------------------------------------------- Cash and equivalents at end of period $ 3,648,556 $ 848,470 $ 2,919,321 $ - $ 7,416,347 ============================================================================
15 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of Block Communications, Inc. (the "Company") should be read in conjunction with our unaudited Consolidated Financial Statements and notes thereto included elsewhere herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We base our estimates and judgments on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate these estimates and judgments on a continual basis. Actual results may differ from these estimates and judgments. We believe the following critical accounting policies affect our significant estimates and judgments used in the preparation of the consolidated financial statements. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to change, resulting in an impairment of their ability to make payments, additional allowances could be required. We maintain various employment related liabilities, such as workers' compensation and medical reserves, based on historical performance and current trends. Actual results could differ from estimates resulting in adjustments to the recorded liability. Actuarial assumptions have a significant impact on the determination of net periodic pension costs and credits and other post-employment benefits. If actual experience differs from these assumptions, future periodic pension and post-employment costs could be adversely affected. GENERAL For the three months ended June 30, 2002, we had revenues, EBITDA and net loss of $106.2 million, $18.7 million and $6.9 million, respectively. This represented increases in revenues and EBITDA over the quarter ended June 30, 2001 of $883,000 and $3.2 million, respectively. The net loss is due to a $9.0 million loss on early extinguishment of debt. Advertising revenues are generally highest in the fourth quarter, due in part to increases in retail advertising in the period leading up to and including the holiday season. In addition, broadcasting advertising revenues are generally higher in even numbered election years due to political advertising. For the six-month period ended June 30, 2002, we had revenues, EBITDA and net income of $208.2 million, $32.6 million and $6.1 million, respectively. This represented increases in revenues and EBITDA over the six-month period ended June 30, 2001 of $6.0 million and $9.3 million, respectively. The net income is due a $21.6 million gain on disposition of Monroe Cablevision partially offset by the loss on early extinguishment of debt. Set forth below are the operating results and a reconciliation of net income to EBITDA for the three months ended June 30, 2002 and 2001 and the six months ended June 30, 2002 and 2001. 16 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------------------------------------- 2002 2001 ------------------------ ------------------------ Revenue: Publishing $ 64,646,626 60.9% $ 67,859,634 64.4% Cable 25,240,422 23.8 22,237,089 21.1 Broadcasting 9,686,810 9.1 8,865,495 8.4 Other Communications 6,652,448 6.3 6,381,326 6.1 --------------------------------------------------- 106,226,306 100.0 105,343,544 100.0 Expense: Publishing 61,227,791 57.6 65,295,840 62.0 Cable 22,392,149 21.1 18,641,371 17.7 Broadcasting 8,954,146 8.4 9,421,843 8.9 Other Communications 6,635,577 6.2 7,181,472 6.8 Corporate general and administrative 505,795 0.5 600,224 0.6 --------------------------------------------------- 99,715,458 93.9 101,140,750 96.0 --------------------------------------------------- Operating income 6,510,848 6.1% 4,202,794 4.0% Nonoperating income (expense): Interest expense (5,894,078) (4,746,827) Gain on disposition of Monroe Cablevision - - Loss on early extinguishment of debt (8,989,786) - Change in fair value of interest rate swaps (1,183,769) 674,797 Interest income 22,116 22,462 ----------------------------------------- (16,045,517) (4,049,568) ----------------------------------------- Income (loss) before income taxes and minority interest (9,534,669) 153,226 Provision (credit) for income taxes: (2,716,119) 5,530 Minority interest (79,947) (13,220) ----------------------------------------- Net income (loss) $ (6,898,497) $ 134,476 ========================================= Add: Interest expense 5,894,078 4,746,827 Provision for income taxes (2,716,119) 5,530 Depreciation 10,954,638 10,027,203 Amortization of intangibles and deferred charges 920,926 1,011,072 Amortization of broadcast rights 1,748,818 1,612,863 Loss on disposal of assets 5,948 36,610 Change in fair value of interest rate swaps 1,183,769 (674,797) Loss on early extinguishment of debt 8,989,786 - Less: Film payments (1,351,658) (1,406,012) ----------------------------------------- EBITDA $ 18,731,689 $ 15,493,772 -----------------------------------------
17 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BLOCK COMMUNICATIONS, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------------------------------------------------- 2002 2001 ------------------------------------------------------------------------- Revenue: Publishing $126,209,428 60.6% $129,714,071 64.1% Cable 50,337,257 24.2 43,384,995 21.5 Broadcasting 18,687,463 9.0 17,592,705 8.7 Other Communications 13,005,192 6.2 11,530,016 5.7 ------------------------------------------------------------------------- 208,239,340 100.0 202,221,787 100.0 Expense: Publishing 122,747,104 58.9 130,783,321 64.7 Cable 45,206,105 21.7 37,085,564 18.3 Broadcasting 18,009,185 8.6 18,601,069 9.2 Other Communications 12,879,314 6.2 13,537,085 6.7 Corporate general and administrative 1,457,075 0.7 950,259 0.5 ------------------------------------------------------------------------- 200,298,783 96.2 200,957,298 99.4 ------------------------------------------------------------------------- Operating income 7,940,557 3.8% 1,264,489 0.6% Nonoperating income (expense): Interest expense (10,642,227) (9,422,453) Gain on disposition of Monroe Cablevision 21,600,189 - Loss on early extinguishment of debt (8,989,786) - Change in fair value of interest rate swaps 278,057 (905,023) Interest income 30,947 28,582 ----------------------------------------------------- 2,277,180 (10,298,894) ----------------------------------------------------- Income (loss) before income taxes and minority interest 10,217,737 (9,034,405) Provision (credit) for income taxes: 4,076,413 (2,596,299) Minority interest (87,121) 40,438 ----------------------------------------------------- Net income (loss) $ 6,054,203 $ (6,397,668) ===================================================== Add: Interest expense 10,642,227 9,422,453 Provision for income taxes 4,076,413 (2,596,299) Depreciation 22,277,829 19,792,377 Amortization of intangibles and deferred 1,293,452 1,895,479 charges Amortization of broadcast rights 3,322,689 3,052,523 Loss on disposal of assets 402,814 36,610 Change in fair value of interest rate swaps (278,057) 905,023 Loss on early extinguishment of debt 8,989,786 - (Gain) on disposal of Monroe Cablevision (21,600,189) - Less: Film payments (2,531,544) (2,792,012) ----------------------------------------------------- EBITDA $ 32,649,623 $ 23,318,486 -----------------------------------------------------
18 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 Revenues Total revenues for the three-month period ended June 30, 2002 increased $883,000, or 0.8%, over the same period of the prior year, to $106.2 million from $105.3 million. This increase was primarily attributable to cable, broadcast and telephony operations discussed below, offset by a decrease in publishing revenues. Cable Television. Cable revenue increased $3.0 million, or 13.5%, over the same period of the prior year, to $25.2 million. The increase in cable revenue was principally the result of an increase of $7.96 to $54.80 in the average monthly revenue per basic subscriber. An increase in the monthly basic cable service charge and continued roll-out of new services drove the increase in average monthly revenue per subscriber, with average monthly high-speed data revenue per subscriber of $45.21, up $5.45 over the second quarter of 2001. Since the launch of the digital product in fall of 2001, average monthly digital revenue per subscriber has grown to $14.54 for the second quarter ended June 30, 2002. Revenue generating units increased in the digital and high-speed data categories during the quarter ended June 30, 2002. Net digital additions totaled 2,820 during the quarter, resulting in 12,661 digital customers as of June 30, 2002. Net high-speed data additions totaled 1,119 during the quarter, resulting in 18,547 high-speed data customers as of June 30, 2002. Basic subscribers at the end of the period totaled 153,540, a decrease of 4,698 basic subscribers from the prior year. This decrease reflects the differential of 3,381 basic subscribers between the system exchanged and the system received on the date of the like-kind exchange of Monroe Cablevision. Newspaper Publishing. Publishing revenue decreased $3.2 million, or 4.7%, over the same period of the prior year, to $64.6 million. The decrease was comprised of a $3.3 million, or 5.9%, decrease in advertising revenue due primarily to a decrease in classified advertising of $1.2 million, or 6.0%, resulting from continued softness in help-wanted advertising. Local and national advertising decreased $1.6 million, or 5.9% and $1.2 million, or 14.4%, respectively. Circulation revenue and other revenue, which is comprised of third party and total market delivery, were consistent with same period of the prior year. Television Broadcasting. Broadcasting revenue increased $821,000, or 9.3%, over the same period of the prior year to $9.7 million. The increase in broadcasting revenue was due primarily to an increase in national advertising revenue of $613,000, or 20.4%, and an increase in political advertising of $172,000. Other Communications. Other communications revenue increased $271,000, or 4.2%, over the same period of the prior year to $6.7 million, due primarily to increases in telephony switched services revenue. Operating Expenses Operating expenses decreased $1.4 million, or 1.4%, over the same period of the prior year to $99.7 million. The decrease in operating expense was largely attributable to decreased publishing expenses, which are partially offset by increased cable expenses. Cable Television. Cable operating expenses increased $3.8 million, or 20.1%, over the same period of the prior year, to $22.4 million. The increase was primarily due to a $1.6 million, or 31.0%, increase in depreciation to $6.6 million attributable to the capital expenditures associated with the rebuild of our Toledo cable system and continued roll-out of cable modems and digital cable service. Basic cable programming expenses increased $812,000, or 16.8%, to $5.6 million, due to price increases from programming suppliers. General and administrative expenses increased $888,000, partially due to increases in personal property tax. Newspaper Publishing. Publishing operating expenses decreased $4.1 million, or 6.2%, from the same period of the prior year, to $61.2 million. The decrease was due to a $2.6 million, or 26.3%, decrease in newsprint and ink, resulting from a weighted-average price per ton decrease of $150.48, or 25.7%, and a 3.5% decrease in consumption from the same period of the prior year. Additional savings resulted from overall cost controls and headcount reductions. Television Broadcasting. Broadcasting operating expenses decreased $468,000, or 5.0%, over the same period of the prior year, to $9.0 million. The decrease results primarily from cost controls implemented to offset salary and inflationary costs, with programming and news departments reporting decreases of $373,000 and $120,000, respectively. 19 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Communications. Other communications operating expenses decreased $546,000, or 7.6%, over the same period of the prior year, to $6.6 million. The decrease is due to a $510,000 decrease in operating expenses related to security alarm system sales and monitoring. Operating Income Operating income increased $2.3 million over the same period of the prior year. Cable operating income decreased $747,000 primarily due to increases in depreciation and basic cable programming expenses, partially offset by revenue growth generated from rate increases and roll-out of new services. Publishing operating income increased $855,000, primarily due to newsprint savings and the implementation of an overall expense reduction program, offset by decreases in advertising revenue. Broadcasting operating income increased $1.3 million due to revenue growth primarily from national and political advertising and an overall expense reduction program. Other communications operating income increased $817,000 due to revenue growth from increased telephony sales. Corporate general and administrative expenses were consistent with prior year, reporting a decrease of $94,000. Depreciation and Amortization Depreciation and amortization increased $837,000, or 7.6%, over the same period of the prior year. The increase was primarily due to asset additions resulting from the rebuild of our cable system in Toledo and other capital expenditures to maintain operating assets, partially offset by the effect of the non-amortization provisions of SFAS No. 142, adopted in the current year. EBITDA As a result of the foregoing, EBITDA increased $3.2 million, or 20.9%, over the same period of the prior year. EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization (including amortization of broadcast rights), other non-cash charges, gains or losses on disposition of assets, and extraordinary items and after payments for broadcast rights. EBITDA as a percentage of revenue increased to 17.6% in the three months ended June 30, 2002 from 14.7% in the same period of the prior year. The increase in EBITDA margin was primarily due to the continued roll-out of high margin advanced cable products, lower newsprint prices and the implementation of overall expense reduction programs. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 Revenues Total revenues for the six-month period ended June 30, 2002 increased $6.0 million, or 3.0%, over the same period of the prior year, to $208.2 million from $202.2 million. This increase was primarily attributable to cable and telephony operations discussed below. Cable Television. Cable revenue increased $7.0 million, or 16.0%, over the same period of the prior year, to $50.3 million. The increase in cable revenue was principally the result of an increase of $8.94 to $54.64 in the average monthly revenue per basic subscriber. An increase in the monthly basic cable service charge and continued roll-out of new services drove the increase in average monthly revenue per subscriber, with average monthly high-speed data revenue per subscriber of $42.89, up $7.54 over the first six months of 2001. Since the launch of the digital product in fall of 2001, average monthly digital revenue per subscriber has grown to $13.11 for the six months ended June 30, 2002. Revenue generating units increased in the digital and high-speed data categories during the six months ended June 30, 2002. Basic subscribers at the end of the period totaled 153,540, a decrease of 4,698 basic subscribers from the prior year. This decrease reflects the differential of 3,381 basic subscribers between the system exchanged and the system received on the date of the like-kind exchange of Monroe Cablevision. Newspaper Publishing. Publishing revenue decreased $3.5 million, or 2.7%, over the same period of the prior year, to $126.2 million from $129.7 million. The decrease was comprised of a $3.9 million, or 3.7%, decrease in advertising revenue due primarily to a decrease in classified advertising of $2.5 million, or 6.2%, resulting from continued 20 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS softness in help-wanted advertising. The decrease in advertising revenue is due to the continued economic conditions that are generating lower than expected advertising sales. Circulation revenue increased $447,000, or 1.8%, to $24.8 million due to an increase in Sunday circulation revenue caused by the occurrence of one additional Sunday in the six months ended June 30, 2002 as compared with the six months ended June 30, 2001. Other revenue, which is comprised of third party and total market delivery, was consistent with same period of the prior year. Television Broadcasting. Broadcasting revenue increased $1.1 million, or 6.2%, over the same period of the prior year to $18.7 million. The increase in broadcasting revenue was due primarily to an increase in national advertising revenue of $664,000, or 11.9%, and an increase in political advertising of $631,000. Other Communications. Other communications revenue increased $1.5 million, or 12.8%, over the same period of the prior year to $13.0 million. The increase resulted from growth in telephony switched services revenue. Operating Expenses Operating expenses decreased $659,000, or 0.3%, over the same period of the prior year to $200.3 million. The decrease in operating expense was largely attributable to decreased publishing expenses, which are partially offset by increased cable expenses. Cable Television. Cable operating expenses increased $8.1 million, or 21.9%, over the same period of the prior year, to $45.2 million. The increase was primarily due to a $3.3 million, or 32.5%, increase in depreciation to $13.3 million attributable to the capital expenditures associated with the rebuild of our Toledo cable system and continued roll-out of cable modems and digital cable service. Basic cable programming expenses increased $1.6 million, or 16.4%, to $11.3 million, due to price increases from programming suppliers. Newspaper Publishing. Publishing operating expenses decreased $8.0 million, or 6.1%, from the same period of the prior year, to $122.7 million. The decrease was principally due to a $4.4 million, or 22.8%, decrease in newsprint and ink, resulting from a weighted-average price per ton decrease of $129.19, or 22.2%, and a 2.8% decrease in consumption from the same period of the prior year. Additional savings resulted from overall cost controls and headcount reductions. Television Broadcasting. Broadcasting operating expenses decreased $592,000, or 3.2%, over the same period of the prior year, to $18.0 million. This decrease reflects a decrease of $369,000 in amortization expense due to implementation of SFAS No. 142 in the current year. Otherwise, operating expenses were held essentially flat due to general cost controls implemented to offset salary and inflationary costs. Other Communications. Other communications operating expenses decreased $658,000, or 4.9%, over the same period of the prior year, to $12.9 million. The decrease was a result of a $780,000, or 16.1%, decrease in operating expenses relating to security alarm system sales and monitoring due to a decrease in sales volumes as well as cost control initiatives. Operating Income Operating income increased $6.7 million over the same period of the prior year. Cable operating income decreased $1.2 million primarily due to increases in depreciation and basic cable programming expenses, partially offset by revenue growth generated from rate increases and roll-out of new services. Publishing operating income increased $4.5 million, primarily due to newsprint savings and the implementation of an overall expense reduction program. Broadcasting operating income increased $1.7 million due to revenue growth primarily from national and political advertising and an overall expense reduction program. Other communications operating income increased $2.1 million due to revenue growth from increased telephony sales. Corporate general and administrative expenses increased $507,000 from prior year due primarily to increases in salary, professional fees, and amortization of deferred financing costs. Depreciation and Amortization Depreciation and amortization increased $1.9 million, or 8.7%, over the same period of the prior year. The increase was primarily due to asset additions resulting from the rebuild of our cable system in Toledo and other capital expenditures to maintain operating assets, partially offset by the effect of the non-amortization provisions of SFAS No. 142, adopted in the current year. 21 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EBITDA As a result of the foregoing, EBITDA increased $9.3 million, or 40.0%, over the same period of the prior year. EBITDA is defined as net income before interest expense, provision for income taxes, depreciation and amortization (including amortization of broadcast rights), other noncash charges, gains or losses on disposition of assets, and extraordinary items and after payments for broadcast rights. EBITDA as a percentage of revenue increased to 15.7% in the first six months of 2002 from 11.5% in the same period of the prior year. The increase in EBITDA margin was primarily due to the continued roll-out of high margin advanced cable products, lower newsprint prices and the implementation of overall expense reduction programs. LIQUIDITY AND CAPITAL RESOURCES Historically, our primary sources of liquidity have been cash flow from operations and borrowings under our senior credit facilities. The need for liquidity arises primarily from capital expenditures and interest payable on the senior subordinated notes and the senior credit facility. Net cash provided by operating activities was $21.6 million and $14.5 million for the six months ended June 30, 2002 and June 30, 2001, respectively. The net cash provided by operating activities is determined by adding back depreciation and amortization and adjusting for other non-cash items, including for the six months ended June 30, 2002, a $278,000 gain resulting from the change in fair value of interest rate swaps, a $21.6 million gain attributable to the exchange of Monroe Cablevision, Inc., and a $2.7 million write off of deferred financing costs related to extinguished debt. Cash used in investing activities was $1.0 million for the six months ended June 30, 2002, compared to $31.7 million from the same period of the prior year. Offsetting the net cash used in investing activities in the six months ended June 30, 2002, was $12.1 million of proceeds received from Comcast Corp. in the exchange of Monroe Cablevision, Inc. Our capital expenditures have historically been financed with cash flow from operations and borrowings under our senior credit facility. We made capital expenditures of $13.6 million and $37.6 million, including capital leases, for the six months ended June 30, 2002 and June 30, 2001, respectively. Capital expenditures for the six months ended June 30, 2001 were used primarily to rebuild the Toledo cable system and maintain other operating assets. We expect to make capital expenditures of $24.9 million in the last two quarters of 2002, primarily to continue the roll-out of advanced cable services, to convert our television stations to FCC-required digital format and for various other improvements to the publishing and broadcasting operations. Financing activities provided $4.4 million of cash for the six months ended June 30, 2002, compared to $20.4 million from the same period of the prior year. During the first half of 2002, we refinanced the entirety of our previous debt outstanding, resulting in new proceeds of $250.0 million and $10.0 million of deferred finance costs. At June 30, 2002, the balances outstanding and available under our new senior credit facilities and subordinated notes were $250.0 million and $112.8 million, respectively, and the interest rate on the balance outstanding was 8.03%. At June 30, 2001, the balances outstanding and available under our previous senior credit facility and senior notes were $231.7 million and $31.5 million, respectively, and the interest rate on the balance outstanding was 7.90%. The increase in the balance outstanding and the effective interest rate generated an increase in interest expense of $1.2 million, or 13.0%. In April 2002, we issued $175 million of 9 1/4% senior subordinated notes. As noted above, the proceeds were used to repay our existing senior term loan and senior notes and prepay a portion of our existing senior revolving credit facility. In May 2002, we entered into new senior credit facilities totaling $200.0 million. The proceeds were used to refinance the remaining balance of the existing senior revolving credit facility and will be used to fund future capital expenditures. The new senior credit facilities are guaranteed by substantially all of our present and future domestic subsidiaries and are collateralized by a pledge of substantially all of our and the guarantor subsidiaries' material assets. Subsequent to June 30, 2002 we made cash payments of $20.2 million for payoffs of cash advances on life insurance policies and contributions to the corporate pension plan. We believe that funds generated from operations and the borrowing availability under our new senior credit facilities will be sufficient to finance our current operations, our cash obligations in connection with the planned capital expenditures, and our current and future financial obligations. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 22 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our revolving credit and term loan agreements bear interest at floating rates. Accordingly, we are exposed to potential losses related to changes in interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes; however, in order to manage our exposure to interest rate risk, we have entered into interest rate swaps. As of June 30, 2002, our interest rate swap agreements expire in varying amounts through April 2009. The fair market value of $75.0 million of our long-term debt approximates its carrying value as it bears interest at floating rates. As of June 30, 2002, the estimated fair value of our interest rate swap agreements was a $5.3 million liability, which represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. As of June 30, 2002, we had entered into interest rate swaps that approximated $221 million, or 88.4%, of our borrowings under all of our credit facilities. The interest rate swaps consist of $121.0 million relating to our revolving credit and term loan agreements, and $100.0 million principal amount of the senior subordinated notes. In addition, we had entered into an interest rate swap agreement that has the economic effect of substantially offsetting $55.0 million notional amount of the $121.0 million notional amount of the swap agreements. Accordingly, a hypothetical 100 basis point increase in interest rates along the entire interest rate yield curve would have increased our annual interest expense by approximately $1.1 million. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Statement of the Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement Nos. 137 and 138, (collectively, SFAS No. 133), which requires the Company to record all derivatives on the balance sheet at fair value. At June 30, 2002, the Company participates in six interest-rate swap contracts. One of these contracts is accounted for as a fair value hedge and therefore changes in the fair value of the derivative have no impact on the Company's results of operations. The remaining contracts either do not qualify for hedge accounting or the Company has not elected to implement hedge accounting. Accordingly, a non-cash derivative valuation gain (loss) of $278,057 and $(905,023) has been recognized during the six-month periods ended June 30, 2002 and 2001, respectively. Effective January 1, 2002, the Company adopted SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. Purchased goodwill and indefinite lived intangible assets are no longer amortized but reviewed annually for impairment, or more frequently if impairment indicators arise. Intangible assets with lives restricted by contractual, legal or other means will continue to be amortized over their useful lives. During the six month period ended June 30, 2001, the Company recognized $1,674,070 of amortization expense related to goodwill and indefinite-lived intangibles, resulting in net loss of $4,723,598 when adjusted for the non-amortization provisions of SFAS No. 142. The Company has completed the initial impairment testing required by SFAS No. 142. No impairment charges have been recognized based on the results of this testing. Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. The adoption of this standard has had no effect on the Company's consolidated results of operations or financial position for the six months ended June 30, 2002. In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued and requires a gain or loss related to the extinguishment of debt to no longer be recorded as extraordinary item. The Company has elected early adoption as encouraged by SFAS No. 145, which would not otherwise require adoption until fiscal year 2003. As a result, losses on extinguishment of debt totaling $9.0 million are included in income from continuing operations at June 30, 2002. In July 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued and applies to fiscal years beginning after December 31, 2002. The pronouncement requires certain costs associated with a restructuring, discontinued operation or plant closing to be recognized as incurred rather than at the date of commitment to an exit or disposal plan. The Company does not expect the adoption of this standard to significantly impact its financial position or results of operations. 23 PART I. FINANCIAL INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements contained herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from expectations contained in such statements. Factors that may materially affect our future financial condition and results of operations, as well as any forward-looking statements, include economic and market conditions and many other factors beyond our control. For an additional discussion of risk factors relating to our future financial condition and results of operations, reference is made to the discussion under the caption "Risk Factors" in the Registration Statement on Form S-4 dated July 17, 2002. 24 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99.1 Certification of the Managing Director pursuant to 18 U.S.C. Sec. 1350. Exhibit 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350. (b) No reports on Form 8-K were filed during the quarter ended June 30, 2002. 25 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BLOCK COMMUNICATIONS, INC. (Registrant) Date: September 19, 2002 By: /s/ Allan Block ------------------------ ------------------------ Allan Block Managing Director Date: September 19, 2002 By: /s/ Gary J. Blair ------------------------ ------------------------ Gary J. Blair Executive Vice President/ Chief Financial Officer CERTIFICATION OF THE MANAGING DIRECTOR I, Allan Block, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Block Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; /s/ Allan Block ------------------------ Name: Allan Block Title: Managing Director Date: September 19, 2002 ------------------- 26 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER I, Gary J. Blair, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Block Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; /s/ Gary J. Blair - -------------------------- Name: Gary Blair Title: Executive Vice-President/Chief Financial Officer Date: September 19, 2002 ------------------------------- 27 EX-99.1 3 j9618401exv99w1.txt EXHIBIT 99.1 Exhibit 99.1 Certification Pursuant to 18 U.S.C. Sec. 1350, the undersigned officer of Block Communications, Inc. (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 19, 2002 /s/ Allan Block --------------------- ---------------------------- Name: Allan Block Title: Managing Director EX-99.2 4 j9618401exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 Certification Pursuant to 18 U.S.C. Sec. 1350, the undersigned officer of Block Communications, Inc. (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 19, 2002 /s/ Gary J. Blair ------------------------------ -------------------------------- Name: Gary J. Blair Title: Executive Vice-President/ Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----